Your Portfolio in an Election Year

The S&P 500, which I mention regularly here, is typically used a stand-in for the entire US stock market. It is of course only one of three such major financial indexes, but it’s broad and diverse, tracking 500 large U.S. businesses that span all 11 market sectors (utilities, energy, health care, etc). 

 

Since its inception in 1957, the S&P 500 has returned about 12,000% not including dividend reinvestment and depending on how it’s measured. That’s a compound annual growth rate (CAGR) of 7.4%. Add in all dividends issued in that time and the totals would be substantially greater. 

 

So which US presidential administrations saw greater returns in the last 70 years? Again, it depends on how you measure. Average CAGR? Median CAGR? 

 

The S&P 500 managed an average CAGR of 6% under Republican presidents but 9.8% under Democratic presidents. However, the index has achieved a median CAGR of 10.2% under Republican presidents and only 8.9% under Democratic presidents. So when you’re listening to the political blowhards, remember that both teams can correctly claim superior returns.

 

Statistics are fun (and frustrating) precisely because it’s often possible to facilitate the desired outcome by approaching data from different angles. What if instead of looking at the entirety of each administration’s time in the White House, we look at every individual year? From that perspective, the S&P 500 achieved an average annual return of 7% under Republican presidents and 11.4% under Democratic presidents.

 

A touch clearer right? But wait— note two points. First, by looking at each year separately, we are unable to account for compounding, which is a powerful tailwind to any long-term portfolio and without which we are left with generally inaccurate data. Second, by far the two most impactful market ‘crashes’ in the last 70 years occurred under Republican presidents: the 1973 oil crisis and the 2008 Great Recession (2020’s pandemic crash was smaller and much shorter-lived). These outlier events completely skew the numbers— and arguably neither was directly the fault of the sitting president.  

 

What about Congressional control? Do Democrats or Republicans have a better track record of market gains?

 

 

When Republicans held the majority in the Senate or the House, stocks averaged 11.9% and 11.0% respectively. This far exceeded the 6.3% and 7.7% returns when Democrats had the majority. When Congressional control was split (which occurred 26% of the time), stocks performed the best, averaging 13.3% per year. When one party held the White House and the other controlled all of Congress, stocks also did well, averaging 10.1% per year. Stocks' worst performance was anytime one party held all three— the White House and both branches of Congress— no matter which party.  

 

So if a Democratic president and split Congress are the combination generally better for markets, is that the outcome we should hope for? Vote for? Sure, if the only variable we’re interested in is market movement. But most of us cast our votes on a variety of policy preferences. Which would seem to leave us in a quandary facing a major election. Which party is better for broad market gains? Answer: It doesn’t matter!

 

The question itself is absurd, and unhelpful. Markets move based primarily on two complex factors: macroeconomic trends and investor sentiment. The economic side is statistical and measurable:  Are interest rates higher than recent trends? Is borrowing dropping or are debt levels stable? Are we in a military conflict, or a trade war, or a pandemic or housing crisis? But the sentiment side is notoriously difficult to lock down: Are consumers feeling confident or assumptive? Cash-heavy or cash-poor? Greedy or fearful? Markets generally don’t move much (or don’t continue moving) based on the party in power. 

Which means the best advice I can give is the same as ever. Say it with me: 

Always be buying

Ignore the noise

Don’t fret over Trump’s promised tariffs against China or his likely tax cuts for the rich. Don’t worry about Harris’s desire to double down on the child tax credit or to increase housing construction. It won’t mean much to your returns over time. Just keep socking your money away in a simple index ETF like the S&P 500 (SPY) and focus on taking care of your health, your family, your community. 

 

Vote, of course— it’s your duty as a citizen. But when it comes to your porfolio, don’t worry about the elections. 

 

Some Thoughts on Market Turbulence

A wonderful little piece by my colleague Joe Wiggins came in this morning. If like me, you are trying to make sense of the awful market drops the last few trading sessions, this is a reminder of what matters. Link to the article below, and I've reprinted some of the gems. 

https://behaviouralinvestment.com/2024/08/06/i-cant-explain/

I Can’t Explain

AUGUST 6, 2024 / JOE WIGGINS

So, what was it that caused the sell-off in risky assets and sharp increase in volatility? The Fed? The Bank of Japan? The end of an AI bubble? A soft employment number? The yen carry trade unwinding? All of the above? Something else entirely? 

Who knows? The truth is that financial markets are a complex, chaotic and deeply intertwined beast, which makes both predictions and explanations impossibly difficult. Not that this stops us attempting both. For most investors a rationalization of events doesn’t even matter— markets are volatile; sometimes uncomfortable and inexplicable things occur. What’s more important is what happens to us during bouts of market turbulence. This is where the real damage is done.
Here are a few things to bear in mind:

– The fact that people are scrambling around to decipher what happened in recent days should be a salutary lesson in the folly of market predictions. We can’t even give confident explanations for events after they have occurred; what makes us think we can do it before!?

– People who didn’t predict the market sell-off will confidently foresee what is to come: “I didn’t see this coming, I cannot explain what caused it, but I am going to tell you what happens next.”

– When an unpredictable event occurs it unfortunately makes us increasingly susceptible to forecasts. We feel anxious and uncertain, so become even more desperate than usual for a comforting guide to the future.

– Everyone will start to say that “uncertainty has increased”. This cannot be true. It makes no sense to claim that we were more certain about things before an unpredictable occurrence. Markets are always uncertain; sometimes we are complacent.

– Living through periods of market tumult is always challenging, even over short horizons. It is far easier to deal with such spells in theory than in practice.

– A new market narrative will take hold incredibly quickly and everyone will start using a fresh set of buzzwords that are consistent with the current set of events.

– Everything seems obvious after the event. Of course US employment was weakening, of course the Magnificent 7 would come under pressure, of course the yen carry trade was a tinderbox. 

What is happening right now will be the most important thing, and we will easily and quickly extrapolate into the future. Living through periods of turbulence is taxing. It is easy to talk about the long-term, staying invested, and compounding returns when markets are going up. It is an entirely different story when the reverse is true, but these are the times when behaviour really counts.

What's Holding You Back

First up: as of today August 5, Nvidia is down 30% from its June peak—and my post in which I said it was time to start selling. (Apologies— I’m usually more modest. Not often I nail the timing so perfectly!)

 

Now, on with the new post.

 

 What’s Holding you Back

 

It's time.

 

You've been thinking about investing toward retirement forever. You can’t help but know about how fast the market has been moving, how much more can be made in the stock market than in any other investment vehicle. You've noticed a few hero companies whose stocks you wished you owned (Nvidia, Apple, Microsoft..). You've even tucked a little of your paycheck away, preparing to make a move.

 

But you have not actually hired a financial advisor, or opened a trading account, or have any idea what to do. It seems like a lot of work, it's frightening, you're not sure you have the money, and you wouldn't know where to start. What are you going to have to sacrifice? What if you screw it up? 

 

Your path to wealth has been blocked. You’ve been ducking it, putting it off. Let's take a look at your top excuses. 

 

I don't know where to start, or how to set it up, or who to trust.

 

This is so much easier than many people realize. Setting up a portfolio account at an online brokerage like E*Trade or TD Ameritrade is simple and straightforward. Both are easy to navigate, offer a quality, trustworthy service (they are owned by financial giants Morgan Stanley and Schwab, respectively), and they offer lots of online help and service reps available by phone if you get stuck. Both provide loads of information about the market, how it works, trading parameters, and about any particular stocks you're interested in. Both platforms have a relatively tiny minimum account size. They don’t charge for trades— buying and selling equities is free. You'll need to link your existing savings or checking account and then transfer in the opening balance. It’s about as complicated as setting up an account on Amazon. 

[Robinhood, too offers an easy-to-use format, quick setup and no fees. But Robinhood ‘gamifies’ its platform, rewarding you with digital confetti and trumpets, even points (!) each time you buy or sell. Similar to the ‘Likes’ you get following a popular post on Instagram or Facebook, which unavoidably drive when and what you post, I believe all of them incentivize the wrong behaviors. The last thing you want to do is start trading more often. Avoid.]

Of course, you should decide at some point if you want professional help. It’s not generally necessary at the start of your investing career, as your needs are straightforward and simple to achieve on your own. But as your portfolio grows and becomes more diversified and complex, it might make sense to seek assistance. The Wall Street Journal’s Is a Financial Advisor Worth It? (paywall) is a great starting point. The piece describes various types of advisors, benefits and concerns, and expected costs. In some cases, you might not even need or want one. Do a little research to determine whether your needs would benefit at this stage from pro advice.

 

But the biggest hurdle for most folks is actually sitting down to deal with it. It never seems easy or convenient, so it’s like steam cleaning the carpet or painting the laundry room— it gets forgotten or put off until years have gone by. Don’t let that happen.

 

I haven't done it because I don't have enough cash to invest. 

 

But you do. Most working people can find at least a few hundred or even a few thousand per year if they get just a little more disciplined— and if they transfer a little cash into their investing account automatically with each paycheck. 

 

It doesn't take much to begin: there are plenty of great companies with share prices under $100. Even when a share is more than that, most brokerages allow purchases of partial shares: you enter how much you have to invest, and the system tells you how much you can buy. Once you do, sit back. 

 

Watching your money earn for you, while you're busy working or sleeping or vacationing or otherwise completely ignoring it, is among the greatest pleasures. Why toil endlessly for your income when you can eventually teach your money to the heavy lifting? You'll want to do it more. Unlike nearly any other activity, the secret to investing is not to do more, it’s to do less. The harder you work, the more you trade in and out, the worse your returns. Learn to let it ride.

 

I usually advise to invest any and all funds you are confident you won’t need for at least three years. Rainy-day fund, nest egg stuff. Then set up your checking account so that 5% of your direct-deposited paycheck automatically transfers into your portfolio. You’re a lot less likely to spend money you don’t see, and you can probably withstand a 5% hit to your cashflow to pay yourself forward like this. You might even throw in part of a bonus, or ‘found money’ from finally selling that stuff in the basement. It will add up! Then increase the dollar amount or even the percentage over time as your income rises. 

 

 

I haven't done it because it's tons of work and it's scary. What if I blow it?

 

What does your savings account pay you in interest per year, one one-hundredth of a percent? Why don’t the banks just admit that’s effectively zero? And in the US, the average annual inflation rate has generally been 3-6%. Which means if you're keeping your cash in savings you're constantly losing money. 

 

Doesn’t it make you mad that your savings is worth less every year? Of course! But if instead you put that cash to work for you, even in a simple S&P 500 index fund you’ll average 5-10% per year more or less forever.

And you absolutely don’t have to pick stocks to achieve impressive returns. Stock-picking is more art than science. It requires study and experience to choose well and you need a strong stomach to endure the inevitable slides. But investing your hard earned savings in a couple of broad stock indexes over time turns out to be a low-risk high-reward way to capitalize on the markets. At very low cost, exchange traded funds (ETFs) trade just like stocks but offer broad exposure to an entire index with one trade.

• SPY or VOO for the S&P 500 index
• ONEQ for the Nasdaq composite index 
• QQQ for the Nasdaq 100 index 

A broad-index ETF like these will rise and fall week to week but will grow over time. In the long term you basically take on broad economic risk but get rid of individual-company risk. If you always put in cash you don’t need for a few years, and you ride through a few inevitable recessions without panic, there will always be more in the future.

 

I won't pretend it isn't scary. It’s not Monopoly money. If you choose individual stocks instead of or alongside your index funds, you will inevitably make some bad choices (after 30 years I still blow it regularly). There will be some losers among your investments. That’s normal, and it an essential part of learning to do this, so don’t let it get to you. But if you read or reread this blog (start here), you'll have a good idea what you're looking for and how overall you can make big gains over time. That's the key: over time. You don’t want to get rich quick; you want to build wealth slow.

This chart demonstrates the estimated value of the Dow Jones Industrial Average stock index from George Washington’s presidency to now. Wouldn’t you want your money to do that?

There is no faster-appreciating asset class than stocks, no better way for your dollars to multiply on their own than by purchasing shares of a smart and growing company or a broad and stable index. If you're looking for overnight riches, as I've said before, look somewhere else. But we already know you're patient, or you wouldn't have read this far. You can succeed in the stock market. 

 

You just need to get started. Right now: heck, compared to last week, the whole market is on fire sale this week! What a great time to begin!